Q3 2021 Cognizant Technology Solutions Corp Earnings Call
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Ladies and gentlemen, and welcome to the cognizant technology solutions third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time. Please press star one on your Telus.
Phone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys. Thank you I would now like to turn this conference over to Mr. Tyler Scott Vice President of Investor Relations. Please go ahead.
You may begin your presentation.
Thank you operator, and good afternoon, everyone by now you Should've received a copy of the earnings release and the Investor supplement for the company's third quarter 2021 results. If you have not copies are available on our website cognizant dot com.
The speakers we have on today's call are Brian Humphries, Chief Executive Officer, and Jan Siegmund, <unk> Chief Financial Officer.
Before we begin I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC and.
Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information to our investors reconciliations.
Reconciliations of non-GAAP financial measures, where appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC with that I'd like to turn the call over to Brian Humphries. Please go ahead Brian.
Thank you Todd and good afternoon, everyone, we executed well in the third quarter delivering revenue of $4 $7 billion up 11, 8% year over year or 11% in constant currency.
Bookings growth, a key leading indicator accelerated to 24% year over year growth in the third quarter.
Our book to Bill ratio of one two times revenue on a trailing 12 month basis underscores our commercial momentum.
I'm grateful to our teams around the world for their resourcefulness and meeting our cloud commitments, despite the challenging labor market.
We delivered solid sequential adjusted operating margin expansion in the third quarter as we offset the cost of increased hiring with cost discipline elsewhere.
I'm also pleased with the progress against our key strategic initiatives for.
For example, third quarter digital revenue grew 18% year over year.
Digital represents 44% of our overall revenue mix.
We expect this percentage to grow in future periods positioning cognizant for boats topline momentum and margin expansion.
Moreover, the intimacy of our C suite engagement increases as we serve clients in their digital transformations.
Better than expected growth in our non digital business impacted our digital mix progression, but is nonetheless, a welcome outcome.
During the third quarter, we saw continued strong topline momentum in our digital business operations practice, reflecting our differentiated offerings for digital natives or be past leadership position in healthcare and our strength in intelligent process automation solutions.
We recently announced called him for neuro is simpler and more effective way for clients to achieve the full potential of intelligent process automation and speed time to results.
Everest group, a leading industry analyst firm recently recognized cognizant neuro is an exciting development to enable automation at scale.
Moving to industry segments financial services ongoing recovery with continued with growth of four 3% year over year in constant currency in line with our expectations.
We posted strong double digit growth year over year in constant currency in products and resources and communications media and technology.
Within products and resources, we continued to deliver excellent growth in manufacturing logistics energy and utilities as well as across retail consumer goods and travel and hospitality.
Which have recovered to pre pandemic levels.
Communications media and technology, we continue to lead with our digital engineering capability to win transformation deals, while leveraging our alliances to be a premier cloud transformation partner.
In healthcare, we had another solid quarter, achieving nine 8% constant currency growth.
Momentum in life Sciences continued.
Amanda across payers remained strong and we're beginning to see an uptick in demand across providers as they look to digital technologies to help reduce operating costs and strengthen new channels for delivering care.
Our products business saw continued double digit growth in Q3.
We're expanding our footprint in the healthcare market and adding new growth members on our platforms.
We're also well underway with our digital transformation of our products, including the launch of our connected interoperability solutions to help clients provide secure.
Real time data access and meet compliance deadlines.
We're proud of the work we're doing in partnership with clients like parkland community Health plan.
Portland was looking for better ways to meet the growing needs of its medically underserved populations in Texas, That's a better managers health insurance claims member transactions and network of physicians and hospitals.
Our trades at a queue next core administration platform.
Delivered in a B pass model is enabling delivery of care management claims processing member services provider services and quality on a single platform, thereby enhancing care coordination and member experiences.
Our healthcare business is a hugely strategic asset I'm pleased with the progress we've made accelerating growth in healthcare and I'm optimistic in our future prospects as health care companies modernize their business to address the need for enhanced client experiences include.
Including virtual care solutions.
Let's turn now to strategy, including our digital ambitions I remain bullish on both the macro demand environment in cognizance growing momentum in digital.
Clients continue to accelerate their investments in digital operating models to improve their customer and employee experiences and modernize their operations through data automation and cloud.
Cognizant is now one of the few global firms that can serve clients across all stages of their digital transformation for modernizing their technology foundation to implementing agile workflows.
This is in part a result of investing approximately $3 billion in mergers and acquisitions over the past few years to broaden our portfolio, while strengthening our relationships with hyperscale or some key partners.
Good client example is Cabot Corporation, a global leader in specialty chemicals and performance materials, who recently engaged us to help transform their digital operating model will.
We'll be providing application development and maintenance as well as infrastructure and operation services, and enabling Cabo to create an enhanced digital experience that drives value for its customers and employees.
Scaling our international operations is another strategic priority and.
During the third quarter, we grew with bookings and revenue solidly in both Europe and rest of world.
With a highlight being 19% constant currency revenue growth in the United Kingdom.
We remain optimistic on the international market prospects and aimed to accelerate growth as we invest in our talent brand partnerships and operations.
Global Biopharma leader Sanofi has selected cognizant as a strategic partner to deploy an omnichannel customer engagement model.
The solution will enable their customer facing teams to engage with the healthcare professionals via new digital channels provide them with personalized content and also suggest next best actions.
Cognizant deployed the cloud based CRM integrated marketing automation and intelligence data platform to the first 18 markets in just eight months.
And for her Majesty's revenue and customs the U K government's tax authority, we're providing broad technology expertise across its pegged technology stack.
And enabling peg application development and operational support that will facilitate case management and customer service applications.
Moving on now to the intensifying competition for talent across multiple industries.
The demand supply imbalance and then all of our industry remains particularly acute.
Third quarter voluntary attrition reached 33% on an annualized basis or 24% on a trailing 12 month basis.
A reminder, when we measure attrition, we can't the entire company, including trainees and corporate across services and B P O.
Despite elevated attrition, we increased our net head count in Q3 by over 17000 sequentially, which speaks.
To the tremendous work and effectiveness of our recruitment team.
Given our focus in recent years on accelerating fresher hiring in India, we've made meaningful progress on addressing our pyramid in.
In the fourth quarter, we expect to make offers to 45000, new graduates in India for Onboarding in 2022.
Retention of recruitment have our leaderships full attention.
We're continuing our comprehensive program to support our associates career growth and engagement through a range of initiatives that include committed annual increases and evolved approach to promotions.
<unk> Board. So associates can easily explore opened leadership roles companywide abundant new training and development programs.
Sustained communication with our commitment to belonging and inclusion across our company and to society more broadly.
Okay.
And the continuing pursuit of an ESG agenda, we chose special meeting for our associates.
To this point earlier this year, we published our first ESG report.
Instead, I was on a path to reduce our emissions and increase our energy efficiency.
Last week, we announced cognizance commitment to achieve net zero greenhouse gas emissions by 2030.
We plan to achieve this net zero go through ongoing investments in renewable energy.
Building on our initial success in India, where a quarter of our energy has come from renewable sources.
2020.
We will also be investing in new energy efficient technologies across our offices and data centers globally.
In addition, we will extend our expertise in cloud Iot and AI to help clients meet their sustainability goals.
In closing.
While the industry faces an unprecedented competition for talent during the third quarter, we attracted a record number of employees to cognizant and stayed focus on delivering against our client commitments and our strategic repositioning.
We are bullish on the industry and on oral growing commercial momentum.
Yeah, and I look forward to discussing cognizance future with you at our November 18th Investor briefing.
With that I'll turn the call over to Yan, who will cover the details of the quarter and our financial outlook before we take your questions yeah over to you.
Thank you, Brian and good afternoon, everyone.
Q3 revenue was $4 7 billion.
Representing growth of approximately 12% or 11% at constant currency.
Revenue growth was led by digital which grew 18% and represented 44% of total revenue for the quarter.
As Brian mentioned earlier, our digital business operations practice area is also growing strongly.
But your growth includes approximately 300 basis points of growth from our recent acquisitions.
Moving on to segment results will all growth rates provided will be year over year in constant currency.
Financial services revenue increased approximately 4% in line with our expectations. We continue to make steady progress as we reposition this business and have seen recent improvement in bookings and pipeline. We continue to expect modest growth for this segment for the full year.
Healthcare revenue increased approximately 10% again, driven by strong performance in both our healthcare and life Sciences businesses.
Revenue growth within our healthcare business was primarily organic and demand for our integrated software solutions remains strong.
We also remain very pleased with our life Sciences business, which grew double digits organically year over year.
Products and resources revenue increased approximately 18%.
They can buy the sixth consecutive quarter of double digit growth in manufacturing logistics energy and utilities.
Retail and consumer goods and travel and hospitality also grew double digits year over year with the bulk sector is experiencing healthy demand for digital services as a recovery from the impact of the pandemic in 2020.
Segment growth also included approximately 600 basis points from inorganic revenue.
Communications media and technology revenue, 19%.
Approximately 500 basis points of growth was attributable to recent acquisitions.
Organic growth was led by our technology business, where olive work with digital native clients has continued to drive growth in our core portfolio.
From a geographic perspective, North America grew approximately 10% year over year, driven by demand from healthcare life Sciences manufacturing logistics energy and utilities and technology.
Growth in North America also included the benefit of recently completed acquisitions across segments.
Revenue outside of North America grew approximately 16% year over year in constant currency led by growth in the U K.
We are also experiencing strong growth in Germany, and Australia given in Pompe.
Simply completed acquisitions of ESG mobility, and <unk>, respectively.
Now moving onto margin.
In Q3, our GAAP operating margin was 15, 4%.
And adjusted operating margin was 15, 8%.
Adjusted operating margin excludes the impact from the legal settlement, which if approved by the court will rule.
Resolve the previously disclosed 2016 securities class action lawsuit.
On a year over year basis, adjusted operating margin declined approximately 10 basis points.
Continued elevated attrition resulted in higher subcontractor recruiting and other delivery costs.
Additionally, our recently completed acquisition negatively impacted our margin and we continue to invest in SG&A to drive and support organic revenue growth and modernize our core it and security infrastructure. These headwinds were partially offset by savings from our cost initiatives.
In 2020 in 2021.
Our GAAP tax rate in the quarter was 25, 6% and our adjusted tax rate was 26% towards the high end of our full year guidance.
Diluted GAAP EPS was $1 <unk> and adjusted diluted EPS was $1 <unk>.
Now turning to the balance sheet.
We ended the quarter with cash and short term investments of $2 4 billion.
With net cash of $1 7 billion.
Free cash flow in Q3 was $897 million.
Representing approximately 165% of net income and in line with our expectations.
Year to date free cash flow of $1 5 billion represents over 90% of net income.
DSO of 72 days increased by one day sequentially.
Is flat with the prior year period.
Management remains keenly focused on this metric as it is a key lever for free cash flow conversion in the future.
During the quarter, we repurchased one 3 million shares for $100 million.
Under our share repurchase program and returned $127 million to shareholders through our regular dividend.
Year to date, we have returned over $1 billion to shareholders through share repurchases and dividends in line with our previously disclosed capital allocation framework.
During the quarter. We also spent cash of $57 million on acquisitions, bringing the year to date spend on acquisitions.
$700 million.
Yeah.
Turning to guidance.
For Q4, we expect revenue in the range of $4 75 to $4 $79 billion.
We're presenting year over year growth of 13, 5% to 14, 5%.
Or 13, 3% to 14, 3% in constant currency.
Our guidance assumes currency will have a favorable 20 basis points impact and inorganic contribution of approximately 310 basis points.
As a reminder, Q.
Q4, 2020 revenue was negatively impacted by the $107 million charge related to our proposed financial services contract exit.
Which is expected to benefit Q4, 2021 year over year growth compares by approximately 250 basis points.
At the midpoint of our Q4 revenue outlook we.
We expect full year revenue of $18 5 billion.
Presenting 11, 1% growth.
Nine 8% growth in constant currency.
With that we are guiding towards the high end of our prior full year guidance.
Our outlook assumes currency will have a favorable 130 basis points impact and includes 330 basis points contribution from inorganic revenue.
Our guidance also assumes continued momentum across healthcare.
T and products and resources and a modest growth in financial services for the full year.
Moving onto margins.
Our full year adjusted operating margin outlook is unchanged at approximately 15, 4%.
As I mentioned earlier elevated attrition is leading to increased costs in certain areas.
<unk> recruiting and subcontractor cost in.
In addition to higher wages for lateral hires.
We also continued to invest significantly in our people through increased compensation rolling quarterly promotions for billable associates and training.
As a reminder, our annual merit increase for the majority of our associates is effective October one this will.
Impact of our Q4 margin and implies a sequential decline in adjusted operating margin from Q3.
To partially offset these headwinds we continue to moderate the pace of nonstrategic SG&A spend.
This leads to our full year, adjusted EPS guidance, which is $4 <unk> to.
$4 six.
Compared to the $4 to $4 <unk> previously.
Our full year outlook assumes interest income of approximately $30 million compared to $25 million to $30 million previously.
Our outlook assumes average shares outstanding of approximately $528 million and a tax rate of 25% to 26% both share count and tax rate are unchanged from our prior outlook.
Finally, we continue to expect free cash flow will represent approximately 100% of net income for the full year.
With that we will open the call for your questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys in the interest of time, we ask that you limit yourself to one question and one follow up one moment, while we poll for questions.
Our first question comes from the line of Tien Tsin Huang with Jpmorgan. You May proceed with your question.
Thank you so much I wanted to ask on the attrition in the gross margin lines and what to think about here going into the fourth quarter gross margin this quarter was actually.
Pretty healthy despite the step up in attrition that you had signaled to us. So looking ahead, what what should we think about there with attrition in.
And gross margins, specifically and are you able to pass along price increases have you seen any delivery execution issues that kind of thing. Thank you.
Hi, Tien Tsin, it's Brian and I'll pass it to Jan maybe directly after this so.
Look first of all attrition is elevated when you're going into the quarter. It would remain elevated we expect going into the fourth quarter and we will also remain elevated however, we do expect some modest declines in attrition rate and that is healthy we look naturally yet resignations on a daily basis, we we think as we hopefully shown into.
Of course of the year, we understand what's going on what to expect from an attrition point of view.
Clearly, while the headline number is high when you apply the rate of attrition to more industry standard definitions such as a trailing 12 month basis. What we think we are more in line with the industry in the low twenties.
Yeah as I think about this we spent a tremendous amount of effort to try to address that both hearts and minds as well as compensation Hearts and minds is less of an impact on our margin compensation does so just.
We think about hearts and minds, we're thinking about it.
Belongingness celebrating success career path discussions training and development.
And making sure that we have the processes in place where people can actually.
Get promoted more readily internally and so we've made a series of adjustments to internal processes to facilitate that we both have really embraced the bottom of the pyramid. After a few slower years between 2017 and 19.
What we call Gen Z or fresher intake has increased meaningfully and that is also helping our pyramid and our ability to have upward promotion capabilities. This year as we've said in her prepared remarks, we will add 45000 offers so I feel pretty good about what we're doing from an attrition point of view. The reality is however, we are in an industry that is facing unprecedented.
Competition for talent and we continue to see attrition in the same areas as we've talked about previously named Ehealth skills as well as the bottom of the pyramid.
Pricing and on margin implications I'll pass you to yet.
Yeah Tien tsin.
Maybe I'll start with the gross margin in the third quarter, which was relatively consistent to prior year and there are obviously lots of ins and outs and clearly we observe the impact of increased compensation on to.
The thing that we had also positive effects like for example, a modest shift in our digital revenues is helping us overall the acceleration of revenue growth has been a factor of helping.
Our gross margin and a lots of ins and out and compare year over year because of the COVID-19 situation.
So you should expect in the fourth quarter pressure on our gross margins.
Implementing our compensation increase for the vast majority of our associates.
Having implemented October 1st So you do see some pressure on the gross margin in the fourth quarter and clearly we're kind of working on all elements of.
Of curtailing that but I think you will see net pressure pricing.
I wanted to do two comments before I pass it back to Brian you know of course that.
The pricing.
Take some time to implement.
Since clients have longer term contracts, but when we when I observe in particular, our digital business.
I think I can say that our clients start to really see the value that Congress and it's delivering and understand the value that we can bring to so we're pleasantly pleasantly.
Presently.
Satisfied, but really happy with the situation that.
That our core thesis about our strategy to shift to digital by having higher gross margin is holding in helping us over the medium term on the gross margin side.
Back to you, Brian Yeah, well actually you've largely touched upon what I was going to say I think the implications of digital is of course important from a pricing point of view wholesale competitors against which were going up.
<unk> us to be a very strong challenger brand and so we have pricing I would say.
Krishna as opposed to dilution and then just one other important points over the last few years. Many people have asked me, how I think about structured deals or cap. The pay cuts we've naturally heavily embrace digital and our growth rates in digital has been twice that of the industry over the last two years one of the benefit of digital is of course, the smaller contract duration to get to that given the nature of the work Youre performing.
<unk>, which which ensures we haven't actually been locked into multiyear pricing dimensions as part of a five or an eight year contract. So that's actually in a strange way worked out to be quite favorable for us going forward, but all of this is heavy lifting we have to get right in the quarters ahead, but we feel that we're on the right track.
Great. Thank.
Thank you for your complete answers guys. Thank you.
Our next question comes from the line of Keith Bachman with Bank of Montreal. You May proceed with your question.
Hi, Thank you very much good evening I wanted to ask similar question, Brian, but theyre going to.
But in a different direction you used the word unprecedented I agree it does seem to be unprecedented attrition, but I'm wondering what slows it you've talked about specific steps that cognizant is taking but it is clearly an industry problem.
The other side is that doesn't require a slowdown in revenues across cognizant its competitors as an order for attrition to come down but I'm just wondering.
What are some of the industry forces that might help alleviate some of this pressure and then Brian I will just go ahead and ask my second question since related as you're facing such unprecedented attrition. How do you think about the trade offs that you need to make.
Related to growth versus margins as you look out over the next couple of quarters or even the next year.
Hey, Keith so.
So let me start with the second question given this fresh in mind look we've already started making some of those trade offs on growth versus margins I think the reality is I'm delighted with our team and our recruitment engine was really.
Executing extremely well in the last few quarters and will continue to execute well going forward and hence we've had a and that head count increase sequentially of seven.
<unk> thousand and by the way, which exclude subcontractors, which also grew but the reality is we don't have enough head count to fulfill our potential and.
And therefore, we've been faced with choice points, which clients to serve which deals to chase, where we walk away, where we're willing to make pricing stances that may put a deal at risk, but it's the appropriate thing to do given the demand supply imbalance.
That is already underway Keith.
<unk> seen the same thing, we're really delighted with the commercial momentum we have bookings growth of 24% in the quarter, which brings year to date up to mid teens on the on the back of mid teens bookings growth last year tells me that we have actually really turned the corner in terms of commercial momentum. So those tradeoffs are underway I would like nothing more to accelerate hiring from.
Current levels.
So that we can really fulfill against our true potential but at this moment in time. Despite all the net adds and they were record levels in the quarter.
We have enough attrition as does the rest of the industry to mitigate that.
With regards to the first question around the industry forces that will alleviate attrition look it's a very difficult question to answer it the reality is.
See immediate line of sight to this I foresee elevated attrition in the industry in the coming quarters I think the only winner in times like this is actual individual employee.
Cause companies like us to win from this clients to win from this.
This will right itself over time, and hence our focus both not just in our compensation work stream, where we set up a war room from a retention point of view about nine months ago. At this stage and we spent an extraordinary amount of time on the hearts and minds angle and I personally spend an hour per day with five groups of five or six employees.
That are deep into the organization to make sure where we're hearing the message understanding what's in their mind validating that they understand what we're up to I will say I like the fact that we are back to double digit growth more sustainably because that helps us get a little bit more swagger back and cognizant and obviously it demonstrates an ability for us to benefit of our.
Clients.
As much as our clients our employees and talk about the fact that they will have career advancement opportunities and we will have gross margin opportunities to invest in their careers and training and development et cetera. So.
Jim will tell what's going to happen over time, but we've really we're doing what we can do.
And core to that is also the year.
Let's see the reinvigoration of our fresher program, which had stalled but I think at this stage, we're starting to get our pyramid back into the right shape. After a few years of being off kilter.
Okay. Thanks, Brian.
Our next question comes from the line of Rod bourgeois with deep dive equity research you May proceed with your question.
Okay, great. Thank you Hey, Brian when you started your turnaround effort you made international revenues, our big priority.
Which had been actually something cognizant had somewhat struggled with over the years. Your international growth is outperforming and these latest results. So I wanted to see if you could speak to the levers that you're pulling to help with the international revenue progress and I'd love to get your sense of whether.
You're sort of sustainably on a path to increase the international revenue mix at this point going forward.
Yes, it's a great question, Rob because we very often spend a lot of time on one of our other strategic postures, which is around accelerating our digital footprint, which isn't relevant just on a total corporation level, but also internationally. So scaling our international capabilities is something I'm, 100% focused on.
Today, it's just 26% of our revenue and so if you think about our footprint internationally our brand internationally.
Our operations they are in need of scaling and it's not just revenue scaling, but its also our delivery capabilities over overseas. Both in terms of nearshore and onshore that will enable our shift to digital but also I would say, it's very core to our desire to build out our global delivery network, where we can provide.
Greater business continuity capabilities for our clients as well, we're executing well against those initiatives, we've hired largely refreshed a lot of the international leadership team very senior hires in the U K, Australia, and New Zealand, Germany, and Japan the Nordics.
The people, we've targeted are well connected into local industry. They understand the local market and I would say the impact of that is now becoming more and more evident not just in strong revenue growth in the third quarter, but also in a year to date this year across Australia, UK, Germany in particular.
But also as I think about the bookings momentum we have internationally.
Year to date in Q3 bookings in our international businesses is well above the company average now those people are bringing.
Followership, both from a client point of view as well as from a employee point of view, our ability to attract talent as relevant there.
But they also give me confidence that I'm investing in M&A dollars behind senior leaders, who will take post merger integration activities seriously and as you've seen in the last.
Earlier part of this year, we acquired Serbian in Australia, and New Zealand and ESG mobility in Germany.
And so it goes back to having confidence in the team and having a team who take their responsibilities seriously and her team does fundamentally connected into partnership ecosystem as well as the client network.
Where we are different internationally, but rod I expect we will continue to double down in that arena too.
The notion of industry alignment, we're very strong from an industry perspective in North America healthcare is is obviously, a great example of that and the payer provider space, but as we scale into Europe and Asia are our largest countries. The U K, where we are aligned by industry, but actually some of the country leaders that we've hired now are embracing more of.
And industry alignment in those countries as well, perhaps not across all industries in every country, but there are major industries that we are aligning behind.
I think that is the way to go to get after these market opportunities.
Internationally, so not just am I expecting raw to maintain this level of growth My hope is to accelerate our growth internationally in the years ahead, and we'll certainly talk more about that on November 18th at the Investor Summit.
Very helpful. Hey, I wanted to ask across the pipeline, particularly about large deals and I guess I'm wondering are you significantly pursuing extra large deals in your sales pipeline.
Or are you focusing more on midsize and smaller deals and I'm really asking to see if you are somewhat biased away from the mega deals given sometimes the risk that they entail and given that there's a lot of other deals out there right now given the breadth of demand that exists.
Look I've made no qualms about the fact that my priority was to expose cognizant to higher growth categories, notably digital and international markets. So if I focus on digital the nature of the work we do.
Ends up.
<unk>, it's against smaller contract durations and from my perspective, I agree with the inference in your question.
This is a resource constrained environment and putting valuable resources against digital is much more interesting for me than putting them against catheter structured deals where you may have an apples to orange compare for one year or two but thereafter, you're in a book of business that you have to work very hard to grow I will say you know when I think about our bookings.
Our win rates and our pipeline I have nothing but good thoughts bookings were balanced by industry by geography.
If I think about even within the digital work. We are doing we have actually seen a little more momentum in the $50 million plus category on a year over year basis, and I expect that to continue into the fourth quarter as well and thats different from $500 million of $1 billion deals, but these are very healthy digital type deals for us.
And all of this has led us to be in a position now with bookings growth of 24% year over year in Q3 to have a book to bill ratio that is now solidly in the one two range. So I feel good about that I will say the CEO with the enemy is when you have clients that are indecisive that is not the case at this moment in time.
Pipeline velocity is as strong as fast and so I feel very good about our position I think the strategic choices, we made a number of years ago, where the right choices, we're executing against that and I think we will bear the fruit of that labor in the coming years.
Our next question comes from the line of Lisa Ellis with Moffat Nathanson you May proceed with your question.
Terrific. Thanks, a lot guys good stuff here.
Brian can you break from talking and ask Jan one year in kind of question you've been in your seat as CFO now at cognizant for a little over a year can you just give a quick look back from the CFO seat. What you feel like has been going well in the last year and then what your personal priorities are for the CFO.
Our organization going forward.
Yes.
It's not unexpected question actually.
Lisa.
Well I'll just go back to asking about attrition as you'd like.
No no actually I kind of appreciate I do appreciate the question.
The translation of our four.
Strategic priorities into operational measures and controlled processes is obviously, a big endeavor for a multinational organization like cognizant and the finance organization was really laser focused in supporting.
Those four strategic priorities that Brian has been <unk>.
Looking about gave you examples when you scale and expand.
Sales force and distribution capabilities more effective measures on.
The effectiveness and results of that sales force required and I think you have seen this with improving disclosure in our bookings Scott. So you just see the surface of the effort behind that to drive.
Improved transparency not only for us, but also for the street.
Similar initiatives have been underway for supporting our pricing and analytics capability relative to driving relevance to clients and ensuring that we deliver value to our clients.
Et cetera throughout throughout the four I don't wanted to decline to all.
Explained to all four initiatives, what we're doing but that has been really the primary focus of the work and.
I have to say.
I'm pleased because and the outcome you'll have kind of experienced cognizant is a organization that has made a good in the last couple of quarters on all our promises and that's how I measure ourselves really.
Can be can we fulfill the financial commitments that we make to our shareholders.
In terms of fulfilling our expectation that has flipped out with a lot of work.
Well I think in particular in the last half year here, where we have faced.
Really that changed industry with a high high attrition rates.
So I remain personally excited about that opportunity. It's a company that is changing.
Winning in the marketplace and you can feel that the energy is.
Visibly accelerating.
Over time and that's.
It could be pies fund could be part of that team.
Okay and then my follow up is on the technology partnership side, I think Brian you've mentioned the hyper scaler as a priority.
A number of times can you just give a sense firsthand. The other priority areas that you guys are focused on in terms of smelting technology partnership.
Yes, Lisa look some hyperscale, obviously omni present.
Extremely powerful and the platform scales into various different technologies cloud migration immediately get you into data modernization to AI machine learning Iot et cetera.
But then beyond that we have some of the traditional partners. We've had for for years, some of which were stronger than others. The oracles. The S&P <unk> of the world, but we certainly put a huge focus as well on what I would call next generation leaders companies like service now companies like Salesforce Workday as a reminder, in the last year and a half we acquired.
Collaborative solutions to scale, a workday practice.
We've also done three acquisitions in Salesforce, we have meaningfully changed our position with Salesforce I was in a recent cube here with the sales force leadership team and they were seeing our phrases in terms of how our position in Salesforce has.
Exponentially grown.
And then.
We will continue to do acquisitions in those areas as well that are aligned to our higher growth categories.
Volt has stood up three business groups behind hyper scaler, if it's not lip service. It is true organizations, we take it very seriously I actually see the Hyperscale is now focusing more and more towards industry alignment and cognizant Pittsburg strength, particularly in healthcare and financial services is naturally a interest those now there are.
Individual cases, where you have industry specific plays it could be pegging, a tiger Guidewire Tennant Creek et cetera naturally they are relevant to individual industries within cognizant, but on a more horizontal in nature is the companies I've referenced and then of course in our operations business, which I'm very proud off which has done a fantastic.
Job over the last two years as we've exited content moderation and frankly got the business back to meet the high teens growth and they have very strong partnerships across some of the IPA players in particular automation anywhere you bypass the prism et cetera.
Our next question comes from the line of Bryan Bergin with Cowen You May proceed with your question.
Hey, good afternoon. Thank you.
On margin can you give us a sense of the magnitude associated with some of the larger strategic investments that you had a step up in 2021 and specifically I'm, referring to things like the incremental recruiting infrastructure increased F&I them campaigns, the M&A dilution pressure because I'm trying to frame the level of catch up investment in the business. This year that may not require <unk>.
Such an uptick as we think forward.
Yeah.
Born to be careful in giving you too much with too much detail that it was going to be hard to interpret over time, but.
The margin pressure that we have seen.
The growth in the SG&A.
Approximately 50% or so is due to.
M&A activity could be upfront deal cost could be deal related expenses and higher SG&A load that some of the M&A transactions carry with them. So that has been a meaningful pressure for us, let's say maybe in the range of <unk>.
Around 100 basis points or so and then the rest of the pressure that we've seen is kind of split evenly between the three major areas I would say.
Area number one is our it modernization that's clearly is starting to.
To stabilize and.
Has put pressure on it.
Had investments into our HR and recruiting organization.
In order to scale our.
Hiring activity.
And thirdly, our investments into our sales force.
<unk> marketing capabilities, those would be kind of roughly in even in even buckets I think it's a fair amount to say and in some of those are now starting to anniversary that's kind of what we are starting to anticipate and plateau, we do not want to reduce those expenses, obviously, because they are important to us, but we have found I think level.
That are allowing us to.
To have a more moderated SG&A development going forward, you will see more detail around that obviously in the November meeting.
The third quarter.
A little bit of an indication of what's happening here basically because we had still growth in this strategic investment areas, but we have started to curtail.
And more traditional SG&A areas to offset that and you can see that the curve has started a little bit more work to be done but.
Really.
Developed as I would have expected in the third quarter.
Okay. Thank you for that that's good detail and then just follow up on the better non digital business performance can you just dig in on what Youre seeing as a reason for that and is it sustainable.
So Brian there are multiple elements that play there one of the bigger ones from a weighted impact is actually our business operation of a digital business operations business, which has.
Has it been growing into strong teens within that we have elements that are weak classify as digital and our interdigital mix and there are elements that we don't classify as digital we have tended to be quite disciplined we changed the definition of digital over two years ago at this stage and we've maintained that ever since but there are other areas, including a none.
Element of our AI and analytics portfolio again, we're being disciplined there elements that we use digital and elements that we view as more traditional.
Business intelligence et cetera, and then on top of that we have elements within.
Some of our enterprise applications business Ncis business that have grown as well.
Our goal to be very honest in a multi year basis is to mitigate the.
Risk of declines in the non digital business and hopefully maintain some growth in the non digital business. If we manage to do that which requires us to be very disciplined from a pricing from a renewal point of view.
That will frankly compliment what we expect to be very strong growth in digital and therefore, it's good news for the entire corporation, but at this moment in time that is something that I think you've seen in competitive earnings as well if you extrapolate the digital growth they have versus the total company growth, particularly for those who suggest is a very.
Large portion of their revenue that is digital you will be able to truly extrapolate that they are seeing declines in their legacy businesses.
Okay. Thank you.
Our next question comes from the line of.
James Faucette with Morgan Stanley You May proceed with your question.
That's great and thanks for all the detail today.
And now certainly pleased to see the control arm on margins et cetera. In spite of a very odd environment right. So.
Wondering on on the call around SG&A and I know you've kind of addressed this but.
I'm wondering is there a point at which we are trying to control for those margins et cetera start to cut into the proverbial muscle.
I think John you mentioned, a few areas, where you have shown improvement but are you all the way where you want to be in areas like recruiting et cetera, so that.
You really can continue to March forward, even if if you're controlling a little bit more judiciously expenses.
No I think Brian explained it earlier in the call and reiterated we are keenly focused on accelerating our growth rate you know so we we see momentum organically and with we're going to continue with our capital allocation program as we have announced this so the acceleration of revenue growth is front.
And center in our view, we have ample of opportunity.
As such we have make decisions to of course support the opportunities that we promise to our clients with staffing. So HR will be funded as needed and we're actually very proud about the amount of scaling that we achieved in the amount of change in policy of.
Accelerating the hiring of Freshers optimizing our permit scaling training programs at our size, it's a really important and complicated effort.
The team executed well and I will of course, the company will provide the funding for that that is part of our growth engine, but there are other elements that need themselves more natural to scale in a certain components certain marketing components, certain finance and classic our support functions in the <unk>.
G&A due late themselves.
For scaling.
And we're going to continue to fund obviously, our sales force.
In the distribution area I'm actually pretty pleased we we have a good combination of growth in resources, but also improvement in productivity in those sales forces.
We have been busy at work to optimize our go to market strategies and I think we have more opportunities in that space.
But also we will be funding our organic growth appropriately to capture those opportunities. So I am not too religious here relative to what the exact percentage growth of SG&A is.
But.
You'll get the philosophy kind of in my answer yes, no for sure and then as we're trying to model things out and I realize it's a super dynamic world but.
How are you planning for things like timing and impact of return of TNT, what that will look like I'm just trying to make sure that at least we understand kind of what your planning assumptions may be like going into the next couple of quarters.
Yeah, So I'd be excited about talking about it.
Next year in the next quarter end.
And I'm not expecting any meaningful increase in my table.
Expense for this quarter, but to be a little bit more forthcoming obviously the decisions of the return to work are going to be affected by really a myriad of factors our client needs. Our associates preferences, the health situation by country and it is really a dynamic. So we are evaluating this basically on a monthly basis.
And at the current point.
Still as our competitors are largely in a virtual environment, which has worked actually pretty well for us. So we are planning to think about this as a strategic opportunity that meets the needs of all of those stakeholders going forward and.
I have to say that is it.
Work in progress, but we really evaluating and there will be a gradual decision to the new business model that will be different than the historic business model.
Thanks for those comments John.
Yeah.
Our next question comes from the line of Moshe <unk> with Wedbush Securities. You May proceed with your question.
Hey, Thanks for asking for letting me ask a question here and congrats on very strong numbers two questions one.
Digital was up 18% I think you said, it's still kind of trailing some of the pure play digital names.
Brian what do you need to do to get to those growth levels.
Some of your peers and then on the attrition side.
Are we at a point, where we are feeling comfortable that.
Yeah.
<unk>.
The employees that we're losing are not at the senior level because we just had some you know in the past as you know you've had some.
High caliber kind of.
Departures from the company Thanks, a lot.
Yeah listen I think we've got a great senior leadership team. These days most of the senior changes are behind US I would view as to be very much in business as usual these days retirements interns.
Internal promotions.
Some performance orientation, but this is kind of classic Fortune 200 company land at this stage.
I've got to say I'm delighted with the leadership team we have around US. These days, we've we're getting back into a growth trajectory. After a few years, where our backlog and our pipeline hasnt been on bookings hasn't been as strong as they.
Needed to be and I think you've seen United leadership team here.
Orienting the company towards a evolved business model, both geographically as well as the offerings that we ultimately solution and deliver.
So that's not a concern of mine anymore and of course, there will always be press articles about individuals' would accompany with 320000 employees. Please don't get distracted by that or not.
With regards to digital.
Of course, it all depends on the portion of the portfolio you look at our digital growth is 18% within our portfolio. If I look at our digital engineering business. Our growth rate is equivalent to the pure plays that are announcing their results. If I look at our Iot business to the digital growth is as fast as the pure plays out there at the same for our cloud.
Business, our digital experience business so.
As I said, we've tried to be extremely disciplined in the definition of digital and in many ways, we've penalized herself, but as a broader company within the categories. We look at and I'll talk a little bit today since the November 18th.
Investor Summit, we have some gems in our portfolio that are growing at significant rates and ultimately that will continue to drive the growth rate of the company forward a little bit that the mix shift. This last few quarters that has been hanging around in the mid forty's is somewhat.
Reflective of numerator denominator, where the non digital business has actually had some better growth than anticipated.
Thanks, good job.
Our last question comes from the line of Ashwin <unk> with Citi. You May proceed with your question.
Hi, Brian Hi, Ann.
I just wanted to.
Get a little bit deeper into sort of the digital business you mentioned.
For example, it didn't really matter.
Well with digital engineering to get to that experience.
Speaking with some of your competitors.
They often bring up more so application modernization as as an idiot so from from your perspective in the.
Any areas that you are not quite growing as fast.
In the digitally now has that choice or is that I mean, the modernization deals. He just said he had to go after.
Large carve out type stuff and that's not what you want them. He could you talk a little bit about sort of the.
Strategy, where since the availability of talent versus where you are.
Well I just think again it goes back to the definition that companies have for digital.
Being quite intentionally being restrictive and what is digital including our digital businesses are tried that a platform business, which is growing at a very healthy double digit pace. These days significantly up from prior years, but it is not growing at the rate of maybe a digital engineering company pure play because it's not at all the same business our business model. So.
It's important to recognize that everybody's definition of digital and what is within that differs I would say I'm very pleased with our momentum in digital we can always do better we strive to do better, but our exposure to digital exposes us to a higher growth categories as a corporation ultimately higher margin categories as a corporation.
<unk> was up against.
A different set of competitors, where we have pricing dynamics that will be favorable for cognizance pricing and ultimately most importantly for me it makes us much more relevant to clients because we are becoming much more intimate with them as we become part of their transformation journey and as I go around the speak declines around the world when we articulate our strategy and what we're doing.
And start sharing some of the references we have invariably clients are very open to proceeding with the next meeting to better understand what we have to they have optionality versus some of the incumbents. So.
I feel ultimately that we're in the right spaces, we will continue to double down of course.
There are certain industries, where digital is a higher portion of our mix than others and there are certain geographies, where I want to accelerate our digital capabilities not just <unk>.
To Rob's question earlier, the international markets, where our digital mix is lower that it needs to be because historically, we spent a lot more of our focus on structured deals in those geographies, but also the delivery capabilities, both nearshore and onshore to fulfill any demand that we create in our commercial teams internationally, we need to further extend our.
Capabilities, there and we're working on a number of things that hopefully we can announce in the foreseeable future that will.
Hopefully it gives you confidence that we're doing the right thing in that regard as well.
Maybe I add numbers for illustration that could be helpful.
As you know of course, our digital revenue is exceeding our overall company growth and we're gaining share in digital revenues, but for me a good example of the value of strategic focus is also our focus on the four digital AD around said, we have really identified and.
Those are the data monetization the cloud business, our Iot and digital engineering businesses in those priority prioritized areas within digital actually also meaningful outgrowing meaningfully outgrowing our overall digital revenue growth. So I think for our company.
To establish that focus and then execute against those focus areas in a thoughtful way it's a good sign.
There's ample opportunities to expand those things.
The long run, but at least we're seeing in our numbers really the results of exactly what we wanted that strategy to be.
They didn't really get to know maybe.
Okay.
A little bit of a symmetric Atlanta too.
To the call.
Accretion question any any details you could provide I think in the past you have indicated for example that geographically it was higher in India Eastern Europe is fine.
Any details by either level or vertical or geography that you could provide to kind of.
Help understand.
Okay.
Got it.
Yeah look it's I would say if I think about where it is.
Voluntary attrition is highest at the mid to junior levels of the pyramid, primarily in India. It's not just in one location in India, It's broad based.
But also against certain skills, whether it's cloud here, we're talking of Hyperscale or are leading SaaS players like Salesforce digital engineering full stack engineers job of dot net angular or just across data AI and ml technologies I mean, we're seeing significant attrition in those areas.
It's just a hot labor market is.
Extremely.
Consistent I think in the commentary you've seen from our peers in the industry.
And as I said earlier, we're working very hard.
To mitigate that we do expect attrition to fall sequentially in a year over year basis from where it is in Q3 based on the net resignations, we've seen and based on.
What we're seeing.
Following the efforts, we've had around hearts and minds on compensation, but at this moment in time, we are still anticipating elevated attrition in the coming years.
To the question that we received earlier, we're funding in our P&L, what it takes to mitigate that those compensation measures as well as our <unk>.
Recruitment team has been doing an incredible job for us.
We expect to meaningfully scale of headcount in the coming year.
Okay. Thank you very much shrank ashwin I look forward to connecting with everyone on November 18.
This concludes today's cognizant technology solutions Q3, 2021 earnings conference call. You may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.
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